Berkshire Buyback Gives Buffett New Weapon to Face Market Slump

Berkshire Hathaway Inc.’s Warren Buffett, who invested more than $15 billion in the month after the 2008 bankruptcy of Lehman Brothers Holdings Inc., is now prepared to spend cash on his own firm in a market slump.

Berkshire announced a buyback program that gives Buffett, 81, the authority to make his first share repurchases in four decades. Buffett, the chief executive officer since 1970, in February touted Berkshire’s capacity to “play offense” in a crisis. He may have $20 billion at his disposal to buy shares if markets decline, said David Rolfe, chief investment officer of Berkshire investor Wedgewood Partners Inc.

“He’s laid the groundwork to swing big and hard if you wake up some morning and something nasty is going on,” said Rolfe. “He’s going to be on the phone with his broker saying, ‘Buy the shares.’”__________________________________________________________

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The Dow Jones Industrial Average posted its biggest weekly drop since 2008 in the five days ended Sept. 23 amid concerns that the European sovereign debt crisis would pressure worldwide economic growth. Class A shares of Omaha, Nebraska-based Berkshire, which slipped below $100,000 in New York trading on Sept. 22 for the first time since January 2009, traded at its lowest price-to-book ratio this quarter since at least 1990.

Berkshire Class B shares jumped $4.81, or 7.2 percent, to $71.18 at 2:18 p.m. in New York Stock Exchange composite trading, leading the 0.7 percent advance in the Standard & Poor’s 500 Index.

‘Not a Dime’

Buffett previously preferred to use the firm’s profits to buy companies and securities. “Not a dime of cash” has been spent on buybacks or dividends in four decades, the billionaire told investors in his annual letter, published on Feb. 26. Buffett invested $5 billion in Goldman Sachs Group Inc. and $3 billion in General Electric Co. in 2008 when the Lehman failure cut companies off from traditional sources of funding.

“During the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival,” Buffett said in the letter, which accompanied Berkshire’s 2010 annual report. “That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy.”

Earnings from Berkshire’s businesses have grown to about $1 billion a month, and finding uses for that cash has become more difficult, Buffett said in April. Last year, Buffett bought the 78 percent of railroad Burlington Northern Santa Fe that his firm didn’t already own in a $26.5 billion deal, funded partly by issuing Berkshire stock.

Book Value

Berkshire will buy back shares for as much as 110 percent of book value, a measure of assets minus liabilities, and refrain from any repurchase that would push cash holdings below $20 billion, the company said in a statement. Berkshire had about $47.9 billion in cash as of June 30. The stock traded at an average of more than 1.5 times book value since the end of 1999, according to data compiled by Bloomberg.

The disclosure of Berkshire’s stock-purchase criteria may aid the company in outperforming the broader market when equities slump, giving Buffett an edge the next time he considers issuing shares to fund an acquisition, said Buffett biographer Alice Schroeder.

“If people know they’ve got a buyer at 110 percent of book, who would sell it for less than that?” said Schroeder, author of “The Snowball: Warren Buffett and the Business of Life,” and a Bloomberg View columnist. “It puts a floor on the stock and keeps it at a price that is attractive. And it enables them to have an acquisition currency.”

Berkshire traded at about 1.08 times the June 30 book value after Monday’s gain. Declines this quarter in stock holdings in Wells Fargo & Co. and American Express Co. have pressured Berkshire’s book value since June 30. Buffett’s firm may report third-quarter data in November.